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Westpac - The Cautious Consumer (8 May 2013)

Westpac - The Cautious Consumer (8 May 2013)

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Published by: leithvanonselen on May 08, 2013
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Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
Navigating Australian capital flows
The spending and saving behaviour of a cautious consumer
During 2012, we sought to outline Australia’s relative structuralfinancial strengths. Specifically, we discussed the characteristicsof: our net foreign debt (this burden ultimately lies withhouseholds, not the Australian Sovereign); our net foreign assets(diversified and of a significant scale); and, in the last edition, theidiosyncrasies of our current account (the growing importance ofequity flows and the declining influence of private-sector debt).In this edition, we focus on the Australian consumer, theirhistorical leveraging and new-found preference for saving. Withthe help of the annual National Accounts and the FinancialAccounts releases, we go beyond the raw savings rate and lookmore deeply into household’s ‘cash’ savings and their investmentbehaviour over the past two decades.
Lessons learned
In the past 25 years, Australian households have experienced adramatic change in conditions. Over the three and a half yearsto September 1993, the standard variable mortgage rate almosthalved to 8.75% as inflation pressures abated; it subsequentlyaveraged 7.8% prior to the GFC rate-cut cycle. During those 15years, the unemployment rate also declined by almost 7ppts to4% as 3.2 million jobs were added, 62% of which were full time.Over this period, banks increasingly favoured housing. Mortgagedebt’s outperformance in the 1990s recession, weak corporatecredit demand thereafter, and mortgages’ favourable riskweighting under Basel I all supported a 16ppt increase in housingloans’ share of total bank lending, to 46% by 1995, and 58% by2010 (
The State of the Mortgage Market 
, Guy Debelle, 2010).
As households increased leverage
-20020406080100120140160180Mar-77Mar-87Mar-97Mar-07-20020406080100120140160180%%total debtowner occupier housing debtinvestor housing debtother debtratio to income (lhs)
Sources: RBA, Westpac
–0.5ppt pa+0.8ppt pa–0.1ppt pa–1.1ppt pa
8 May 2013
In the past 25 years, Australian households haveexperienced a dramatic change in conditions. Interestrates and unemployment fell materially and remained low;all the while, financial innovation boomed.
This facilitated significant changes in consumer spending,saving and investing behaviour.
The 1990s saw households save little and increase theirleverage substantially as household net worth surged.
The tech bust and GFC resulted in Australian consumerstaking a hard look at their finances, but they are yet todeleverage in aggregate. To date, the leverage taken on byfirst home buyers and (at the margin) upgraders has offsetreductions made by existing borrowers.
The rise in the savings rate of the latter group pointsto leveraged households building an immediate bufferagainst a cyclical shock (likely via mortgage offsetaccounts).
In tandem with our Westpac–MI Consumer Sentimentsurvey, information from the Financial Accounts indicatesthat consumers are unlikely to unwind this buffer soon.Indeed, adverse conditions may see it rise further.
Rise in debt more than an adjustment to low rates
Interest expense* (lhs)Standard variable mortgage rate (rhs)
Sources: ABS, RBA, Westpac Economics*% of net disposable income.All data year to June.
Household worth rose dramatically
Net worth –super & insurance*Net worth –other*Net savings rate (rhs)
Sources: ABS, Westpac Economics
%of net disposable income
*Annual change in net worth,scaled by net disposable income.All data year to June.
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
Given the favourable environment, it is little wonder thatAustralian households took advantage of the growing availabilityof debt. The increased use of debt was primarily focused onhousing. Lower inflation brought with it expectations of lowerinterest rates, while the strong employment outcomes notedabove gave households greater confidence in their abilityto service and pay down debt. Strong gains for asset prices(property and shares) gave owner-occupier activity an additionalboost, and also enticed investors.However, there is another part to this story which is oftenoverlooked: the introduction and progressive development ofthe compulsory superannuation system. While superannuationhad been around for decades, the decade to 2003 saw theintroduction and subsequent development (the increase in thecontribution rate from 4% to 9%) of the compulsory super system.Coupled with growing confidence in the broad economic outlook,households’ greater security in their own long-term personalfinances gave Australian households the assurance necessaryto bring forward investment and consumption by borrowing. Itis striking that, when we subtract employer superannuation andworkers compensation contributions from net savings, the netsavings rate spends close to 20 years below zero. (This does notnecessarily mean that households did not accrue savings overthis period. The numerous imputed cash flows included in thehousehold income and expenditure accounts make it nigh onimpossible to conclude this from the National Accounts.)However, what we can conclude is that the 1990s and 2000ssaw a significant increase in household leverage, with the rate ofgrowth relative to income tapering a little in 2004, then stabilisingin the wake of the GFC.While there has been much talk of deleveraging post GFC, relativeto household disposable income, Australian households havereally only stopped leveraging in aggregate. Debt for owner-occupied housing has continued to increase at a marginal rate,offset by a modest fall in personal and investor lending. Byhousehold type, it is apparent that the leverage taken up by firsthome buyers and upgraders since the GFC has been largely offsetby repayments made by already mortgaged households.Another way to highlight the absence of aggregate deleveragingin the Australian experience is to contrast it to the US: there,household debt relative to income has declined for going onfive years. The divergence between the Australian and USexperience has principally come about owing to the strength ofthe Australian labour market and banking system as well as theimpact of
deleveraging in the US (loan defaults). Australianhouseholds have been able to learn a valuable lesson from afar,and have accordingly adjusted their own behaviour, taking a morecautious approach to debt.
Household investment decisions: an alternative perspective
As noted above, while we are unable to clearly assesshousehold’s ‘cash’ saving behaviour from the National Accountsdue to imputed cash flows, the Financial Accounts publicationgives clearer guidance on the investment and financing behaviourof Australian households. The information in this release is quitetelling; it is also consistent with the message provided by ourWestpac–Melbourne Institute Consumer Sentiment Index.The first two observations that can be drawn from the data arethat Australian households have typically favoured contributing tosuper and building up deposit holdings versus directly investing inequities or debt instruments.
US was forced to deleverage
United States (lhs)Australia (rhs)
Sources: BEA, RBA, Westpac Economics
%debt to disposable income
Aus HH’s financial investment decisions
DepositsSuperannuationDebt instrumentsEquity
Sources: ABS, Westpac Economics
%% of compensation of employees
*4Q sum
8 May 2013
01020304050600102030405060Mar-98Mar-01Mar-04Mar-07Mar-10Mar-13%%sharesreal estatedeposits/superrepay debt*
Sources: Westpac, Melbourne Instituteseasonally adjusted by Westpac*’repay debt’ and ‘super’ options onlyincluded from1997
Consistent with Westpac–MI trend
wisest place for savings
The household savings rate includes super
Net savings ex super* (lhs)Net savings rate (lhs)Gross household debt (rhs)
Sources: ABS, RBA, Westpac Economics
*Excludes superannuation andworkers compensation contributionsmade by employers. RBA historicaldata used as proxy prior to 1990.All data annual; year to June.
Compulsorysuper introducedReaches 9%
% of household net disposable income
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
The minimal flow into debt instruments is arguably more due toan absence of AUD denominated supply, not demand. The verylimited flow into equities other than at the height of global equitymanias (the late 1990s tech boom and pre-GFC period) is moresurprising, particularly given the rise in online stockbroking andpro-equity news flow in the decade before the GFC. Arguablyhouseholds’ appetite for equities is being met indirectly via theirsuperannuation holdings.The trends apparent in the superannuation and depositsseries deserve closer attention. First, it is clear that Australianhouseholds value superannuation; encouraged by its taxeffectiveness, households have contributed more than themandated minimum contribution throughout the entire history ofthe series. The effectiveness of additional incentives (such as thelump-sum contribution tax breaks provided mid decade) can alsobe seen in the data. Despite the winding down of these incentivesover the past five years, households’ preference for puttingadditional savings away for retirement has remained strong. Babyboomers are likely to be the dominant force behind this trend.Turning to deposits, it is apparent from the data that Australianhouseholds saw little need to actively store away freely-availablecash (i.e. deposits) through much of the 1990’s. This is notsurprising given the macro-financial trends discussed above(income growth; lower interest rates; and rising net worth).However, at the turn of the millennium, there seems to have beena shift in consumers’ saving behaviour. From a low of 0.64% inlate 1999, the flow into deposits rose by over 10ppts to 11.1%in March 2002. The initial shift in consumer behaviour likely hada lot to do with the US tech wreck and September 11. However,this change in behaviour looks to have lingered on well afterthese events: the average flow into deposits over the subsequentsix years was almost three times that seen over the decade toDecember 2000.Given that Australian households continued to lever up in thelead-up to the GFC, it does not seem appropriate to concludethat the events of 2000/01 materially and permanently impactedconsumers’ appetite for debt. Rather, it seems Australianhouseholds became more focused on building a deposit buffer toprotect from negative cyclical shocks, all the while still remainingopen to using leverage to invest and consume as opportunitiesarose. The use of mortgage offset accounts likely facilitated thistrend. These accounts allow mortgage holders to save for a ‘rainyday’ and mitigate interest expense while still maintaining accessto the funds.This trend has continued since. The generally favourable macro-economic backdrop and low interest rates have seen first homebuyers continue to enter the market – albeit often sporadically –but existing home owners’ caution has persisted.
Where to from here?
Retailers may well be wondering, given the rise seen in savingsover the past six years, the relatively solid state of the labourmarket, robust house prices and recent share market gains, whyaren’t consumers willing to spend more? The answer comes downto confidence in the macro-economic outlook and the reason theaforementioned savings exist.Simply, to the extent that these savings look as though they areoften held by leveraged households as a buffer against potentialnegative cyclical events, they will not be used for consumptionuntil necessary (a cyclical shock occurs), or the reasons to expecta negative event(s) diminish from sight.
Labour market concerns remain elevated
unemployment expectationsunemployment expectations trend
Sources: Westpac-MI
unemploymentexpected to riseunemploymentexpected to fallpeak,Feb ’09
Westpac household barometer (lhs)*household savings ratio (rhs)
Source: RBA, Westpac Group
*based on: card transactions,mortgageprepayments; credit card usage; and carddebt repayment behaviour
Consumer caution still clearly apparent
more conservativeless conservative
8 May 2013
Consumer confidence is currently only marginally above long-runaverage levels. And, while they have improved, unemploymentexpectations remain at a high level. Ergo, while consumers’ feelthat now is a good ‘time to buy’, their collective perception ofvalue is not translating fully into actual sales because householdsremain wary of the outlook and still regard themselves as beingvulnerable to shocks. Our own household barometer concurs,indicating consumers remain highly conservative.As evinced by the recent developments in Greece and Cyprusand the more general political concerns over Italy and Spain,many potential triggers for financial and economic instabilityremain throughout Europe and indeed the world. Domestically,we are also yet to see concrete evidence that non-mining activitywill be able to support trend GDP growth following the peak inthe mining investment boom. Indeed, recent survey and partialmacro data suggests the opposite is true. Both the NAB businesssurvey and the ACCI–Westpac Survey of Industrial Trends point toweak conditions in the non-mining sector. And, even before themining investment boom peak has been reached, jobs growth hasweakened to be considerably below population growth.Overall, it is clear that leveraged households have sought tobuild a buffer against existing liabilities in addition to super.However, this has not resulted in material deleveraging as therelative strength of the Australian economy has supported newborrowers entering the housing market. Leveraged consumers arewilling to boost consumption sporadically, but they also remainsusceptible to shocks. Given the uncertainty around the domesticeconomy post mining investment boom and the lingering globaluncertanties, persistent strength in consumption seems unlikelyuntil a more certain, positive outlook is in view.
Elliot Clarke,
Economist +61 (2) 8253 8476

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